Leveraging data and technology to build confidence in the cyber class
Howden Re’s Luke Foord-Kelcey and Toby Lampier explain how an innovative cyber retro placement demonstrates the steps that can be taken to better manage exposure.
Today’s cyber reinsurance market contains exposures considered very challenging to model, reminiscent of the property cat market in the mid-1990s. These modelling challenges can inhibit market growth.
Since Howden Re launched its cyber team last year, our focus has been on leveraging the latest advances in data and technology to drive innovation in the development of reinsurance and retro structures and services.
This is with a view to enabling the very significant growth predicted for the cyber insurance market over the rest of the decade. Howden Re believes innovative retro solutions are vital to enable that continued growth.
Until now, reinsurers looking to protect a portfolio combining both excess of loss (XoL) and quota share have needed to solve for each element separately.
Howden Re has taken steps to address this by developing a solution that tackles the complexities of providing XoL protection across a mixed portfolio.
The result is the market’s first cyber “hard retro” placement: an XoL retro protection on a portfolio that itself includes XoL reinsurance.
Howden undertook a significant modelling exercise to enable the development of this solution, drawing on multiple sources of historical and newly commissioned data.
Vendor modelling underpinned the development of a new ground-up view to help understand the processes through which cyber attacks diversify across industries and geographies, and how they can impact a reinsurance portfolio.
Howden has been able to disaggregate the annualised contribution by event and investigate how this accumulates across portfolios.
The novel disaggregation technique used to assign losses allowed the product to be appropriately priced by retro partners, with the aim of materially shortening the collection process.
This enabled the development of forward-looking risk profiles, which Howden intends to continue to update as the relevant data in this space continues to grow.
The product has initially been developed on behalf of Envelop SPA 1925, a dedicated cyber reinsurance vehicle launched in partnership with Apollo Syndicate Management.
Howden Re worked with Ariel Re and other markets to develop the pioneering structure, designed to help meet capital requirements around the SPA’s main disaster scenarios. The placement used an Ariel Re wording tailored for the purpose by Howden.
This solution means the whole portfolio can be protected with a single, cat-focused XoL placement.
Our modelling, contractual and broking framework is now well established for future transactions, and we have received significant initial interest.
So while the cyber market is reminiscent of the property market of the 1990s, this initiative demonstrates that we have the technology to advance cyber in the same direction but in a much shorter timeframe.